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MiFID II

Updated on May 27, 2024
Article byWallstreetmojo Team
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

MiFID II Meaning

MiFID II is the directive that the European Union (EU) has formulated to guide the financial players in the market. It makes the financial sector more accessible, transparent, and effective, helping investors, traders, and other market participants to understand it well and make wise financial decisions accordingly.

What is MIFID II

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The directive is the revised version of the Markets in Financial Instruments Directive (MiFID), which the EU originally published in 2004 and which became fully effective in 2007. The rules and guidelines assist the financial players and ensure that the market is fair, transparent, and active all the time and for everyone.

Key Takeaways

  • MiFID II is the improved version of the directive of the same name, which not only guides the financial market in and around the EU per its earlier counterpart but also protects the interests of the investors.
  • MiFID stands for Markets in Financial Instruments Directive.
  • The MiFID II Framework protects the investor’s funds and encourages investments.
  • While the original version covered only the equity securities, MiFID II was introduced to cover other securities as well, given the turmoil caused in the unorganized financial market in 2008.

MiFID II Explained

MiFID II came into existence to help investors retain their confidence in the financial market during the post-2008 financial crisis. Hence, the financial lawmakers identified the loophole in the earlier version, which only focused on equity investments, and introduced the new one to protect the interests of the investors in 2018. This derivative outlines MiFID II regulations to help structure and organize the financial market.

The directive extended the scope to cover all the securities to increase transparency. Due to increased transparency, the security issuers started maintaining accurate data and returns, increasing investors’ confidence, given the more legal framework and better transparency, helping money float in the market.

The proper guidelines even helped and encouraged people with basic investment knowledge to invest using different intermediary platforms. Plus, a huge reduction was observed in counter trading and private trading. Moreover, speculations in the market also reduced as the directive focused more on controlling the same for the most volatile securities in the market. The introduction of heavy penalties imposed by authorities led to a decrease in the number of frauds.

It also issues guidelines for intermediaries and dealings with business organizations outside the European Union. It strictly rules and regulates the market, and enhances compliance with the legal formalities and submissions for better transparency and accuracy.

Any financial product available in the EU is guided by this directive irrespective of the location of investors, be it within the EU or outside it.

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Objectives

After the financial crisis of 2008, there was a heavy loss to the investors, hampering their level of confidence to a great extent. This, in turn, decreased the number of market investments. The MiFID II focused on investors’ protection and aimed at boosting market investment. The objective behind the issue of the directive was also to bring transparency in dealings so that the confidence of investors increases, given the lower chances of loss involved.

MiFID II Objectives

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Due to the introduction of this directive, the system of reporting was more transparent with increased legal interference and requirements, facilitating efficient flow of money in the market. The speculative transactions also got controlled. In addition, over the counter trading and private trading witnessed a reduction due to more transparency.

The MiFID II aimed to encourage investment by providing accurate and transparent information to let investors decide whether to invest or not and measure the risk. However, it also increases the volatility in the market.

Other purposes that this directive serves are as follows:

  • Strengthens the financial system
  • Issues guidelines for dealings in and outside the EU
  • Safeguards investors’ funds
  • Establishes a transparent legal framework
  • Provides better services to investors

Example

Recently, the European Securities and Markets Authority (ESMA) has been working on framing a new set of EU rules to enforce under MiFID Delegated Regulation. The new guidelines aim to put pressure on asset managers to steer the regular retail investors in the market. A delegated regulation helps add or change the existing guidelines and legislative provisions. However, the French market regulator AMF stated that the new rules won’t apply to the nation’s market until 2023.

Transaction Reporting

MiFID II transaction reporting increased considerably due to new directives focusing on investors. Also, the directives emphasize reporting of all transactions, whether within or outside the European Union. Dealers too must maintain every detail of the client.

The main focus is on regaining investors’ confidence. As a result, investor funds’ safety was given the utmost priority under the new rules. MiFID II has provided a common framework for all the organizations and intermediaries to make the financial statements easy and understandable.

In short, the MiFID II made transaction reporting easier and effective, enabling authorities make key decisions wisely. It helps prevent the investor’s fund and reduce the misuse of funds.

Frequently Asked Questions (FAQs)

What is MiFID II in simple terms?

MiFID II is the framework of rules and regulations that apply to the security market in the European Union to secure and enhance investors’ confidence and safeguard their investment by ensuring transparency of the records.

Who does MiFID II apply to?

It affects funds and fund managers, investors, traders, stock exchanges, financial institution managers, brokers, trading venues, etc. It protects the investor’s fund and encourages investments. Moreover, this directive guides transparency requirements and verifies the same. Plus, it provides directives to the intermediaries of securities dealers, ensuring a harmonized framework for all.

What products are covered by MiFID II?

The products the directive applies to include fixed income, debentures, equities, futures, derivatives, exchange-traded products, currencies, etc.

This is a guide to what is the MiFID II directive. Here, we explain its role in regulating the market & in transaction reporting along with examples. You may learn more from the following articles –